Fuel price shocks triggered by the war in the Middle East are set to push inflation higher, reversing months of price relief for South African consumers.
Image: Freepik
Fuel price shocks triggered by the war in the Middle East are set to push inflation higher, reversing months of price relief for South African consumers.
The South African Reserve Bank (SARB) yesterday in its quarterly bulletin warned that the surge in global oil prices following the outbreak of the conflict on 28 February will place upward pressure on domestic fuel costs in the coming months.
Petrol prices rose about 15% and diesel by roughly 40% at midnight, translating to increases of around R3 a litre for petrol and about R7 per unit for diesel — lower than anticipated, but still significant.
Government has moved to cushion the blow, announcing a temporary R3 a litre reduction in the general fuel levy, similar to measures implemented during the Ukraine war when oil prices spiked.
Yet, Vishal Rama, portfolio manager at Prescient Investment Management, said higher fuel prices “remain a material upside risk to inflation,” despite the temporary tax reduction.
“Higher transport and food costs are likely to reduce household disposable income and weigh on consumer spending,” said Rama
SARB will also be watching for second-round effects, through which initial price increases feed into broader inflation, potentially prompting a tighter monetary policy stance, Rama added.
Concurring is Annabel Bishop, chief economist at Investec, who said the risks remain skewed to the upside.
“For consumers, fuel price increases are not necessarily at an end if the war intensifies over April, negatively affecting fuel prices further. Risks have risen, and the fuel price increase tomorrow, if not quickly reversed in May will weaken gross domestic product,” Bishop said.
South Africans are effectively being hit twice as higher global oil prices and a weaker rand will amplify those increases locally, Dr Ernst van Biljon, head lecturer in supply chain management at the IMM Graduate School, said.
“It is a geopolitical shock to the global energy system, with oil prices having risen dramatically since the onset of the conflict, compounded further by currency volatility in emerging markets such as South Africa,” he said.
Yet, PSG senior economist Johann Els said without government’s intervention, inflation would have risen sharply. He said had the full under-recovery been passed through to consumers, inflation would have reached 4.2% in April. With the levy cut, he now expects 3.6%.
“So that’s a big difference. For now, this is good news. It’s still a pain for consumers, but less of a pain than it would have been before,” he said.
In its latest interest rate statement, SARB governor Lesetja Kganyago said the central bank now expects inflation to reach around 4% in the second quarter, with fuel inflation exceeding 18%.
Kganyago warned that a prolonged conflict could push inflation as high as 5% this year, potentially requiring further interest rate hikes to bring it back to the 3% target.
A shorter conflict would likely see inflation peak closer to 4%, with only one rate increase expected.
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